a perspective on the south african diamond mining industry
TRANSCRIPT
12 April 2016 |
A PERSPECTIVE ON THE SOUTH
AFRICAN DIAMOND MINING INDUSTRY
JAMES AH CAMPBELL
CEO, ROCKWELL DIAMONDS INC“uncover ing the face ts o f our po tent ia l ”
22 April 2016 |
OUTLINE
BRIEF HISTORY OF THE DIAMOND INDUSTRY
DIAMOND INDUSTRY FUNDAMENTALS
THE DIAMOND PIPELINE
SOURCES OF DIAMONDS
ASSESSING DIAMOND POTENTIAL
DIAMOND MINING OPERATIONS AND COMPANIES
REGULATORY AND REPORTING REQUIREMENTS
THE SOUTH AFRICAN DIAMOND MINING INDUSTRY
ROCKWELL DIAMONDS
DIAMOND INDUSTRY TRENDS
CHALLENGES AND OUTLOOK
James Campbell is president and CEO of
Rockwell Diamonds Inc. Previous roles include
Non Executive Director of Stellar Diamonds plc,
Vice President - New Business for Lucara
Diamond Corp, Managing Director of African
Diamonds plc, Executive Deputy Chairman of
West African Diamonds plc.
James worked at De Beers for over twenty
years; his roles included General Manager for
Advanced Exploration & Resource Delivery and
Nicky Oppenheimer's Personal Assistant.
James holds a degree in Mining & Exploration
Geology from the Royal School of Mines
(Imperial College, London University) and an
MBA with distinction from Durham University.
He is a Fellow of the Institute of Mining,
Metallurgy & Materials, South African Institute
of Mining & Metallurgy and Institute of Directors
of South Africa. He is also a Chartered
Engineer (UK), Chartered Scientist (UK) and a
Professional Natural Scientist (RSA).
James also chairs two NPO’s and is deeply
committed to South Africa.
32 April 2016 |
BRIEF HISTORY OF THE DIAMOND INDUSTRY
Diamonds have been known
and treasured for many
centuries
The first diamond deposits
ever to be mined were alluvial
De Beers has been
synonymous with diamonds for
decades
De Beers’ share of the
diamond market has
decreased substantially since
the 1990’s
1700’sEarly days 1800’s 1900’s
• Diamonds
known in India
as early as
2000 BC
• Diamond
merchants
trading since
3rd century BC
• Brazil emerges
as a new
diamond
producer
following
India’s
production
decline
• Rough
diamond
prices fall by
75%
• Brazil remains
top producer
until diamonds
found in Africa
• Alluvial diamond
mining in Russia
First diamond
discovery in South
Africa in 1866
(Kimberley)
• De Beers
Consolidated Mines
established in 1888
• “London Diamond
Syndicate” formed
in 1890: ten
diamond merchants
buying De Beers’
entire production
(first single selling
channel)
• De Beers controls
90% of world
diamond production
• London Syndicate
dissolved
• Diamond Trading
Company formed in
1930s
• “A diamond is forever”
slogan coined in 1947
• New kimberlite
discoveries:• Russia 1950’s
• Botswana 1960’s
• Australia late 1980’s;
• Canada late 1990’s
• Major producers exit
single-channel
system in mid 1990’s
• De Beers Strategic
Review in 1998
(leading to
privatisation in 2001)
Source: GIA, “Famous Diamonds” by Ian Balfour
42 April 2016 |
DIAMOND INDUSTRY FUNDAMENTALS
Demand for rough diamonds is
expected to grow 2-4.5%
annually
This is driven by an increasing
demand for diamond jewellery
in China and India as the
middle class expands
Rough diamond supply is
expected to increase in the
short term, as new mines
come on board
Supply will however be on a
downward trend from around
2019 onwards
Source: Bain
52 April 2016 |
DIAMOND INDUSTRY FUNDAMENTALS
The overall supply-demand
forecast for rough diamonds is
positive in the medium to long
term
Demand is expected to exceed
supply some time after 2019
The rough-diamond supply-
demand balance will be tight in
the next few years
Source: Bain
62 April 2016 |
THE DIAMOND PIPELINE
Only a minor percentage of new
discoveries become economic
mines
It can take over 10 years from
discovery to development of a
new mine
New discoveries have dwindled
in recent years
Rough diamond sales via open
tenders are on the increase
Beneficiation / profit share
arrangements can capture a
share of revenue from polished
sales of high-end goods
Diamond jewellery sales affected
by changes in gold, platinum
prices
Exploration
&
Evaluation
Mining &
Processing
Rough
Diamond
Sales
Cutting &
Polishing
(& Trading)
Jewellery
Manufacturing
& Sales
Two sales
models:
open
tender or
fixed
pricebook
India and
China have
85% of C&P
market share.
Traditional
C&P centres
in Israel, US,
Belgium.
Thailand and
UAE are
emerging
Discovery
and
assessment
of new
diamond
deposits and
development
of Mineral
Resources
Extraction of
ore,
liberation,
recovery
and sorting
of diamonds
US, China
and India
are largest
markets,
followed by
Europe.
Sales down
in China
Source: Bain, Rockwell
Grading &
Valuation
Size, Model,
Quality, Colour
Individual
valuation of
specials
(+10.80ct);
other sizes
split in 1000’s
of categories
and valued per
price points
72 April 2016 |
SOURCES OF DIAMONDS
Kimberlite is the primary source
of diamonds
Diamonds are made of pure
carbon. Diamond and graphite
are “allotropes” of carbon
Diamonds formed in the upper
mantle, under particular
conditions of temperature and
pressure (“Diamond Stability
Field”)
Kimberlite magmas (the vehicle)
transported diamonds from the
DSF to/near surface
Erosion of kimberlites has
created secondary deposits
(alluvial/eluvial and marine)
82 April 2016 |
DIAMOND MINING
92 April 2016 |
ASSESSING DIAMOND POTENTIAL FOR MININGRISK REDUCTION
Confidence in the
deposit/resource improves as
new information is analysed
and assumptions are rivisited
As confidence increases, so
do costs and timeframes
Accurate and reliable resource
models are critical inputs to a
sound economic assessment
Technology plays a key role
Expert operators are able to
compress timeframes by
synchronising workstreams
without compromising on
quality
Deep knowledge, expertise
are key differentiators
Mapping,
sampling,
geophysics
Core drilling or
trenching
(100’s kg)
Initial bulk
sampling
(10-100’s t)
Infill drilling;
bulk sampling
(1000’s t)
Inferred
Resource
Indicated
Resource
Diamond potential;
surface size
estimate
Preliminary grade
estimate; prelim.
geological model
Global grade;
preliminary value
estimate
Geological,
density, volume,
grade, revenue
models
Preliminary
Economic
Assessment
Pre-Feasibility
Study
Bankable
Feasibility Study
DepositTarget /
Anomaly
Activity
Ou
tco
me
sM
inera
l
Re
sou
rce
Eco
no
mic
Stu
die
s
INCREASING COSTS & TIMEFRAMES
DECREASING UNCERTAINTY & RISK
Duration: months
Cost: R millions
Duration: years
Cost: R tens of millions
102 April 2016 |
DIAMOND MINING OPERATIONS
KIMBERLITES
• High establishment costs
• Open pit and/or underground
operations
• Grade, diamond distribution
can be constrained with
sampling and modelling
• High resource confidence can
mitigate uncertainty
ALLUVIALS
• Lower start-up costs
• Low grade, high variability
• High uncertainty
• High volume, low cost
approach
• Scarcity of larger (high-value)
diamonds
• Volumes are key to
repeatability
• Metallurgy and diamond value
management
Primary and secondary diamond
deposits can become economic
mines
Perception that alluvials are
more suited to smaller operators
(juniors) and kimberlites to larger
ones (mid-tier and majors)
Majority of juniors own kimberlite
operations
Majors like De Beers have been
running large-scale alluvial
operations
Offshore marine deposits along
Namibian coast formed by
redistribution of alluvial diamonds
by longshore currents
112 April 2016 |
DIAMOND MINING COMPANIES - MAJORS AND MID-TIER
Company Market Cap Listing Country of
Activity
Operations/projects (K
= kimberlite; A =
alluvial; M = marine)
Alrosa 7.7Bn USD MCX Russia,
Angola,
Botswana
Yakutia and Arkhangelsk
Region (K/A); Catoca (K)
De Beers Owned by Anglo
American plc (85%)
and Botswana
Government (15%)
Botswana,
South Africa,
Namibia,
Canada
Orapa, Jwaneng,
Damtshaa, Venetia,
Voorspoed, Snap Lake
(K), Namdeb (A/M)
Rio Tinto 69Bn AUD LSE,
ASX
Australia,
Canada, India
Argyle, Diavik, Bunder (K)
Dominion
Diamond
970M USD TSX Canada Ekati, Diavik (K)
Lucara
Diamond
Corp
1Bn CAD TSX Botswana,
Lesotho
Karowe, Mothae (K)
Petra
Diamonds
540M GBP LSE South Africa,
Tanzania,
Botswana
Cullinan, Finsch,
Kimberley, Koffiefontein,
Williamson (K)
Stornoway
Diamonds
770M CAD TSX Canada Renard (K)
Mountain
Province
600M USD TSX,
Nasdaq
Canada Gahcho Kué (K)
Gem
Diamonds
150M GBP LSE Botswana,
Lesotho
Ghaghoo, Letseng (K)
Kennady
Diamonds
160M CAD TSX Canada Exploration (K)
Some common traits of majors:
Owners of mining operations
Typically more than one mine
Exploration activities are internally funded through production cashflow
Exploration spend is discretionary
Publicly traded and privately owned
Large corporate structures
Internal assurance processes
Lengthy decision processes
Technical and non-technical management
Some operations have been placed on care and maintenance pending an improvement in market conditions
Source: company websites
122 April 2016 |
DIAMOND MINING COMPANIES - JUNIORS
Company Market Cap Listing Country of
Activity
Operations/projects (K
= kimberlite; A =
alluvial; M = marine)
Lucapa
Diamond
101M AUD ASX Angola Lulo (A)
Firestone
Diamonds
72M GBP AIM Lesotho Liqhobong (K)
Shoregold 55M CAD TSX Canada Star (K)
Diamcor Mining 39M CAD TSX-V,
OTC
South Africa Krone-Endora (A)
DiamondCorp 36M GBP AIM South Africa Lace (K)
Peregrine 52M CAD TSX Canada,
Botswana
Exploration (K)
Trans Hex 365M ZAR JSE SA, Angola Orange River,
Namaqualand, Somiluana
(A)
Kimberley
Diamonds
16M AUD ASX Botswana Lerala (K)
Merlin
Diamonds
13M AUD ASX Australia Merlin (K)
North Arrow
Minerals
13M CAD TSX-V Canada Exploration (K)
Some common traits of juniors:
“The exploration division of the mining industry”
No clear separation between junior and mid-tier companies
No/little production cashflow to fund exploration activities
Exploration spend is vital
Funding through shares issue
Shareholders rewarded through share price increase
Subject to high degree of public scrutiny and assurance
Technical management teams with deep practical experience
Innovative, agile and fast
Source: company websites
132 April 2016 |
HIGHLY SEGMENTED VALUATIONS CONSOLIDATION OPPORTUNITIES
1
10
100
1,000
10,000
1 10 100 1,000 10,000
Mar
ket
Val
ue
(US
$m)
(Lo
g S
cale
)
Annual Revenue (US$m) (Log Scale)
De BeersAlrosa
Dominion
Rio Tinto (Argyle)
Lucara
Firestone Gem
Petra
Trans Hex
Rockwell
Reinet
Diamcor
Majors
Mid-tier
Juniors
142 April 2016 |
REGULATORY REQUIREMENTS
Reporting requirements applicable in selected jurisdictions
Stock
Exchange
Mining-specific Reporting
Requirements (post-listing)
Mineral Reporting
Standard
ASX Annual and half-year financial report
Quarterly report by CP on production
and development activities (incl.
expenditure); exploration activities;
mineral results & ore results
JORC
JSE Annual and quarterly financial report
Description of exploration and mining
activities by CP; mineral resource and
reserve statement
SAMREC ( new version
to be launched in May
2016)
TSX/TSXV Annual and quarterly financial report CIM (NI 43-101)
LSE/AIM Annual and half-year financial report
Interim management statement
Resource updates by CP (AIM)
JORC, SAMREC, CIM,
other selected codes
HKEx/GEM Annual and quarterly financial report
Half-yearly updates on mining
JORC, SAMREC, CIM
Professional codes of practice set
minimum standards for public
reporting. Public reports must be
prepared by a Competent Person
(CP)
Majority of national reporting
standards share a common set of
codes and guidelines
TSX and ASX host the bulk of junior
and mid-tier exploration and
development companies (TSX
prevalently diamond companies)
In 2013, TSX and TSX-V combined
were home to 57% of the world’s
publicly listed mining companies
62% of global mining equity
financing was raised on TSX and
TSX-V in 2013
Source: PWC, Mining Association of Canada
152 April 2016 |
MINERAL RESOURCE REPORTING
Stringent reporting
requirements dictate the type
of information that must be
available at each stage of
Mineral Resource
classification, as well as its
level of accuracy
Key parameters for diamond
resources:
• Volume
• Diamond Grade
• Diamond Value
• Diamond Size Frequency
Distribution
162 April 2016 |
THE SOUTH AFRICAN MINING INDUSTRY
172 April 2016 |
MINING IN SOUTH AFRICA
General trends:
♦ A mature mining sector – declining grades, increasing
operating costs
♦ Infrastructure (chiefly electricity) constraints
♦ Ongoing tension between employers and unions
♦ Rand devaluation not compensating for declining prices
♦ Wages affordability
Commodity trends
♦ Coal production stable, yet not growing in the short term
♦ Platinum production plagued by protracted industrial action
and mine closures
♦ Declining gold production due to deeper mines, rising costs,
decreasing gold price
♦ Over-supply of iron ore, with continuing pressure on price
♦ Diamonds gradually recovering, yet prices still depressed
Mining contributes 6% to SA’s
GDP
Main commodities: coal, PGMs,
gold, iron ore, diamonds
Mining generates 60% of SA’s
exports
In 2014 mining contributed R18
billion to the South African fiscus
Approximately 500,000 people
were employed in the mining
sector in 2014
Source: PWC, SA Chamber of Mines
182 April 2016 |
DIAMOND MINING IN SOUTH AFRICA
Diamondiferous kimberlites are
found on stable cratons, like
the Kaapvaal in SA
De Beers’ Venetia Mine is the
largest South African diamond
producer
Alluvial operations are located
along the Orange River and
the West Coast
De Beers no longer owns
Kimberley Mines (tailings
deposits sold in 2016)
Petra Diamonds’ operations
have been acquired from De
Beers
Koffiefontein
Source: SA Chamber of Mines
Voorspoed
192 April 2016 |
DIAMOND MINING COMPANIES IN SOUTH AFRICA
Company Listing Operations in
South Africa (K =
kimberlite; A =
alluvial)
Annual
Production
(cts)
Annual
Revenue
(US$)
De Beers N/A Venetia, Voorspoed
(K)
4.5M No SA
reports
Diamcor
Mining
TSX-V,
OTC
Krone-Endora (A) +/- 20,000
(incidental)
+/- 3M
DiamondCorp AIM Lace (K) +/- 7,000
(ramp-up)
N/A
Petra
Diamonds
LSE Cullinan, Finsch,
Kimberley,
Koffiefontein (K)
3,000,000 360M
Rockwell
Diamonds
TSX,
JSE
Middle Orange River
(A)
36,000 51M
Trans Hex JSE Lower Orange River,
Namaqualand (A)
62,000 83M
South Africa currently
produces 15% of world
diamonds by volume
In 2014 South Africa produced
8.1 million carats of diamonds
The majority of SA diamond
production is from primary
sources
Diamonds from alluvial
operations are on average
larger (cts/stone) and more
valuable ($/ct)
No new discoveries, nor
significant projects in the
pipeline
Source: company websites, SA Chamber of Mines
202 April 2016 |
ROCKWELL DIAMONDS
212 April 2016 |
ROCKWELL’S PROFILE
• Rockwell is a producing diamond mining company with a
solid track record of safe, low cost, high volume mining
• It is known for producing large, high-value, gem quality
gemstones which comprise a major portion of its diamond
recoveries
• The Company employs almost 1,000 people at its mining
operations, most of them from local communities
• Rockwell has a strong focus on operational efficiencies
• It has successfully embraced Diamond Value Management
and a fit-for-purpose approach to technology deployment
• Rockwell’s medium-term strategic goal is to position itself
as a mid-tier diversified diamond producer
222 April 2016 |
OUR LEADERSHIP TEAM
Rockwell’s leadership team has
over 150 years of combined
diamond experience
The CEO has over 30 years’
experience in diamonds, which
include developing a number of
kimberlites from discovery through
to mining
The CEO and CFO worked at De
Beers for more than two decades
Management team includes a
leading international diamantaire
and specialist in valuation,
marketing and sales of rough
diamonds
A technical management team with
deep practical experience and
strategic vision
232 April 2016 |
OUR GEOGRAPHIC FOOTPRINT
Existing properties, recent
acquisitions and new
prospecting rights
100 kms of river length,
between Prieska and Douglas
in Northern Cape
Access over majority of
Orange River alluvial diamond
fields
242 April 2016 |
DIAMOND MINING IN ROCKWELL
Overburden is removed and
used to backfill as mining
advances
Ore is loaded and hauled to an
in-field screening plant
Screened gravels are
transported to the processing
plant
Discarded fractions are used for
rehabilitation, as are plant
tailings
Concentrate goes to final
recovery sorthouse
Fine residues (inert) are
deposited and reused for
rehabilitation once dry
Optimised EMV fleet is vital
252 April 2016 |
STRATEGIC HIGHLIGHTS 2006-2016
2010
Strategic review
initiated
2006
Rockwell listed on TSX
/ JSE
2011
New CEO + Private
placement + Diamond
Value Management
strategy2012
Internally funded Bulk
X-ray plant
commissioned at SHC
+Klipdam sold
2013
New internally funded
Niewejaarskraal plant
commissioning
2015
Acquisition of Bondeo
(RHC)
2014
New BEE partnership
+ EMV renewal
2016
Corporate restructuring
262 April 2016 |
OPERATIONAL PERFORMANCE FACTORS LEADING TO CORPORATE RESTRUCTURING
- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
1000
1200
1400
1600
1800
2000
2200
2400
2600
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
F2011 F2012 F2013 F2014 F2015 F2016
Re
ve
nu
e (
inc
l. b
en
efi
cia
tio
n (
US
$m
)
Av
era
ge v
alu
e p
er
cara
t (U
S$ 1
2
3 4
5 6
1
2
3
4
5
6
Holpan on C&M
Saxendrift Ext. acquired
Klipdam sold
SHC closed
RHC acquired + NJK on C&M
Saxendrift approaching end of LOM
272 April 2016 |
* Indicative quarterly revenue and +50 carat stone production based on technical reports
PAST
(Actual)
CURRENT
(Actual)
FUTURE: ORGANIC
(Plan)
MIN
ES
(000
M3 /
MO
NT
H)
QU
AR
TE
RLY
RE
VE
NU
E*
# +
50
CA
RA
T
ST
ON
ES
PE
R
YE
AR
*
9
110,000m3 360,000m3 480,000m3
MO
NT
HLY
MO
R
TH
RO
UG
HP
U
T
Time
Rev
enu
e
Time
Rev
enu
e
Time
Rev
enu
e
4427
FUTURE: POST
ACQUISITION (Plan)
700,000m3 growing to 1,000,000m3
Rev
enu
e
48
+22
110
SX SHC NJK WP RH
Time
180
80 100
SX SHC NJK WP RH
200
130 150
SX SHC NJK WP RH
200 200 150 150
150 150
SX SHC NJK WP RH
DIVERSIFYING PRODUCTION BASEFOR STABLE PERFORMANCE
282 April 2016 |
DIAMOND INDUSTRY TRENDS
292 April 2016 |
DIAMOND EXPLORATION TRENDS
Fluctuations in exploration
spend typically mirror the ups
and downs in the markets
Value of exploration for long-
term growth is recognised
Exploration spend however is
regarded as discretionary in
the short term
Majors have pulled back in
recent years
Juniors’ exploration spend
constrained by tougher funding
climate
Diamond exploration spend
peaked around 2007-8
Source: MinEx, SNL
Global exploration spend 1975-2013 (all commodities)
302 April 2016 |
DIAMOND MARKET TRENDS
Rough diamond prices under pressure for past 18 months
♦ High levels of polished in the pipeline
♦ Growing above-ground inventories of rough
♦ Restriction of rough supplies by majors in late 2015 has led to
some restocking
Potential rough supply expected to grow in the short term
♦ New production coming online (+20M cts/yr)
♦ Substantial above-ground stocks remain
♦ Weak currencies in producing countries are boosting margins
Decline in rough supply expected around 2020
♦ Exploration spend down since 2008: no new deposits
♦ Argyle anticipated closure; Ekati, Diavik declining
♦ Expected positive impact on rough prices
Additional factors to consider
♦ Increasing competition from synthetic diamonds
♦ Decreasing value of polished diamonds in jewellery
♦ Unsold rough will increase inventories
♦ Demand growth needs to be developedSource: RBC Capital Markets, Bain
The rough-diamond supply-
demand balance will be tight in
the next few years
Demand is forecast to exceed
supply in the next decade
In the longer term, both
polished and rough prices are
driven by macroeconomic
fundamentals that remain
positive
312 April 2016 |
THE RETAIL SECTOR
Source: Bain, McKinsey
Global diamond jewellery retail
sales grew by 4% in 2014, 2%
in 2015
The luxury goods market is the
traditional reference for
diamond jewellery
Stable growth in luxury goods
in America, Europe
compensated for decline in
Asia-Pacific
Consumers’ preference for
branded jewellery is
increasing, especially in
younger groups
In developed markets, brands
provide differentiation and
identity; in developing markets,
they inspire trust and
confidence (authenticity)
32 3 April 2016 |
DIAMOND JEWELLERY MARKETING
In 2015 De Beers relaunched generic advertising, including its 1947 “A Diamond is Forever” slogan
Jewellery advertising spend is slowly growing again
Keywords related to diamonds and engagement rings attract the bulk of online ad spend around Valentine’s Day
Continued marketing needs to ensure that consumers perceive diamonds as more attractive than other competing goods
Source: De Beers, Forevermark, McKinsey, AdGooroo
12%
29%
59%
Adspendbykeyword(Feb2015)
engagementring/s
diamond/s
diamondring/s
diamondengagementring/s
watches
other
332 April 2016 |
CHALLENGES FOR THE DIAMOND INDUSTRY
Sustaining consumer demand in the long term against
changing consumer behaviours of the new generation. Generic
marketing and branding efforts to be scaled up
Dearth of new discoveries will lead to an inevitable decline in
rough diamond production, creating opportunities for
substitution in the long term
Threat of undisclosed synthetic diamonds to consumer
confidence (especially for smaller stones). Detection
technology and tighter certification requirements can address
this to a large extent
Recycling of second-hand polished diamonds (trade-ins).
Currently at 3-5% of wholesale polished diamond market, but
expected to increase as supply declines and polished diamond
prices rise
Declining profitability in the mid-market segment of the value
chain (cutting and polishing). Likely to result in overall
consolidation in the segment, which will improve efficiencies
Source: Bain, idexonline.com
The impact of synthetic
diamonds (whether disclosed
or undisclosed) is still poorly
understood
Developments in diamond
cutting technology may
increase cutting yields in the
future, thus impacting rough
supply
342 April 2016 |
OUTLOOK AND CONCLUDING REMARKS
Outlook for rough diamond prices remains subdued in short
term
Fundamentals of supply and demand remain solid
The investment case for diamonds remains strong
Diamond stocks continue to be regarded as attractive by
expert analysts
♦ Preference for established producers (over developers)
♦ Growth indicators and positive balance sheets
♦ Preference for large stone producers (better price outlook)
The downturn may not have bottomed out, however a
turnaround is to be expected in the medium term
Increased marketing efforts (both generic and branded) are
required to drive demand growth
Diamond miners are set to
prosper in the longer term
Rockwell is positioning itself to
take full advantage of the
industry turnaround